Global Airlines
Industry – Alla Serebrova
Delta Airlines - Eugene
Southwest Airlines - Shaun
British Airways - Alex
Presentation Agenda
Industry Characteristics
Current State
Market Outlook
Companies in focus:
 Delta Airlines
 Southwest
 British Airways
Glossary
 ASK: The number of seats available for the transportation of revenue
passengers multiplied by the number of kilometers these seats are flown.
 RPK: One-fare paying passenger transported one km. RPK is computed by
multiplying the number of revenue passengers by the km they fly.
 PASSENEGR LOAD FACTOR(%): Percentage of seating capacity which
is actually sold and utilized. RPK divided by ASK
 UNIT COST:The average operating cost incurred per ATK
 YIELD: Passenger revenues divided by revenue passenger-kilometers. PR
per RPK. It represents an aggregate of all the airfare and airline charges
and is measured on a per-kilometer basis.
 BREAK-EVEN LOAD FACTOR: The LF at which operating revenues
cover operating costs. Unit Cost divided by Yield.
Industry Characteristics
 Highly Concentrated Market Dominated by North America (41%)
 Half of the World’s Fleet is operated by just 17 airlines (of 650)
 Half of all ASK are focused on the top 6% of routes (33 airports)
 The Intra-North American Zone Represents 1/3 of the Total

Intra-Asia traffic (10,6%)

Intra-Europe traffic (8,5%)

Europe-Asia travels (7,4%)

Transpacific flights (6,6%)

North Atlantic traffic (11,6%)
 The International Traffic accounts for 57% of total PK
Source: Airlines Gate
Airline Industry is Maturing
Worldwide RPK Growth Rates are Declining
Industry Characteristics
 Capital Intensive
 High Cash Flow
 Labor Intensive
 Highly Unionized
 Thin Profit Margins
 Cyclical/Seasonal
 Travel agencies
Source: Rolls-Royce
Airline costs
Administrative
6%
Depreciation
6%
Transport
Related
10%
Flying
Operations
27%
Passenger
Service 9%
Promotion/
Sales 13%
Maintenance:
parts and
labor 13%
Aircraft
and Traffic
Service 16%
Labor Costs Per Employee
Aircraft
Replacement
 Profitability Triggers New
Orders
 Younger fleet - higher profits
Aircraft Replacement Trends
Business vs. Personal/Pleasure
Revenue and Traffic Shares
Source: Air Transport Association
Not an Industry Free of Risk
Volatility
 Geopolitical Instability
 Oil disruption fears
Jet fuel prices remain high
 Historically airline stocks have tended
to trade in the same direction as fuel prices
 Exceptions: supply shocks
or wars
 Refining margins at $11.9/ bbl
Deregulation and its effects
 The US experience - 1978
 International traffic - bilateral agreements
 Hub and spoke networks development
 Europe (1993) and Asia are still lagging behind
 State aid distortion
 Government indifference
 Airport constraints
 Restriction of slot sales
 Logical outcomes of deregulation:
 Regional LCC:
 Alliances
The Basic Business Model of the
Network Carriers is Broken
 LCC have 30% cost advantage
 Non-unionized workforce
 Better business practices:
 Simple point to point
 Higher utilization, shorter turns,
no waiting at hubs, red-eyes
 No transfers
 Tickets - internet
 Charge for food and drink
Even Constrained to the American
Landscape, LCC’s ≠ Point-to-Point
 Look at the successful LCCs which operate a
core, old-line, network hub operation
•
Air Tran at ATL
•
Frontier at DEN
Global Airlines Alliances
- STAR ALLIANCE (21%)(United, Lufthansa, Air Canada, Air
New Zealand, ANA, Austrian, British Midland, Lauda Air,
Mexicana, SAS, Singapore, Thai, Varig)
- ONEWORLD (17%)(American, British Airways, Cathay
Pacific, Iberia, Qantas, Lan Chile, Aer Lingus, Finnair)
- SKYTEAM (12%)(Air France, Delta, Alitalia, Korean Airlines,
Aeromexico, CSA Czech Airlines
- QUALIFIER GROUP (Swissair, Sabena, LOT Polish Airlines,
TAP Air Portugal, Air Europe, Air Littoral, Turkish Airlines, Volare
Airlines, PGA Portugana Airlines, Crossair).
Star
Oneworld
SkyTeam
Annual Passengers, mlns
296
209
174
Destinations Served, more than
815
559
451
Countries Served, more than
130
134
98
Fleet
2,130
1,852
985
Employees
312,076
269,100
151,000
Alliances: Rational and Benefits
 Rational - very effective at traffic
redirecting
 Increasing the geographic scope of the network
 International market entry restricted by bilaterals
 Most cost effective way to develop a new market
 Maintain presence in a key market
 Benefits
 Revenue Growth
 Cost Savings
2003 – Positive Result despite SARS
 bbb
 ccc
Source: Rolls-Royce
1st Half 2004 Traffic –
Rebound vs. 2003
Global Economic Growth
 Economic growth is the major contributor to air travel
demand
 2004 - 5% highest in 3 decades (China, Japan, US)
Traffic Revenues against H1/ 2000
2004 Cargo Traffic Strong
 Freight represents 28% of total tonne-kilometres

Europe-Asia (23,6%)

Transatlantic flights (19,8%)
Transpacific flights (19,4%)
Traffic by Region
Productivity – Recovery in 2004
 Many FC items: 2 ways to increase productivity
 to increase aircraft utilization
 to increase # of seats
Passenger Aircraft Productivity
1982 - 2008
Economic and Traffic Growth
2004–2023
 Worldwide economic growth will average 3.0%/year
 Passenger traffic growth will average 4-5% per year
 Cargo traffic growth will average 6.2% per year
Market Outlook
 Infrastructure develops alongside air travel demand
 The world fleet will more than double over the next
20 years reaching 34,770 aircrafts (25,000 new)
 Economic and traffic
growth rates vary by
region
Summary
•
•
•
•
•
•
•
•
•
•
•
2004 traffic forecast now +13.5% (18% ytd)
Driven by strong GDP growth in N America
Recovery from SARS in Asia
Aircraft overcapacity being eliminated
Productivity recovered to pre- 9/ 11 levels (75%)
Airline profits recovering in Asia
But yields still very weak in US and Intra- Europe
Costs impacted by $ fuel price
Inability to pass on rises to consumers in US domestic market
Delivery upturn in 2005- 2007 consistent with traffic and
productivity projections
Longer term growth increasingly driven by Asia
D e l t a
A i r l i n e s
Current Stock Information
 Stock Price: US $7.26
 Stock Symbol: DAL
 Exchange: NYSE
 Shares Outstanding: 123.545 million
 Market Capitalization: 911.93 million
 Dividend: $0.00
History & Facts
 Started as crop-dusting operator
 First flight in 1929 as Delta Airlines
 Headquarters: Atlanta, Georgia
 CEO: Gerald Grinstein
 Employee: 60,000+
 Daily flights with partners: 7,500+
 Destinations: 496 cities in 88 countries
Management Team
 Gerald Grinstein
- Chief Executive Officer, 20yrs experience in airline industry
 Michael Palumbo
- Vice President, Chief Financial Officer, responsible for Trans World
Airlines’ on time performance from worst to first
 Joe Kolshark
- Chief of Operations, served Delta for 16yrs, 757/767 Captain
 Jim Whitehurst
- Chief Network and Planning Officer
 Curtis Robb
- Chief Information Officer, 30yrs information technology
experience
Business Structure
 Connection carriers
•
•
•
•
•
American Eagle
Atlantic Southeast Airlines
Chautauqua Airlines
Comair
SkyWest
 Shuttle
• Northeastern States
 SkyTeam Alliance
• Global Alliance
 Song
• Low-cost Carrier
 Codeshare Partners
Current Situation
 Losing over $3 billion since 2001
 Facing bankruptcy protection, Chapter 11 filing
 Expecting 2,000 maintenance, 3,000 customer
service and 1,800 management job losses in 2005
 Agreed 32.5% pay cut, fewer benefits for pilots,
saving nearly $1 billion
Reasons for Delta’s Suffering
 Low cost carriers with minimal debt loads
offering low fares
 Use of high-cost hub-and-spoke operation
 Increase in fuel price
 Greater choices to select from
 Sept. 11 incident causing less demand
 SARS outbreak
 Highest operating per unit cost
 Inability to maintain sufficient liquidity
 Significantly higher pilot salaries
Transformation Progress
 SimpliFares
 Interior Service Upgrade
 Redesign of Atlanta Hub
 Growing Cincinnati and Salt Lake Hubs
 SkyMiles Program
 New Aliances – Continental Airlines, Northwest
Airlines & KLM Royal Dutch Airlines
 Growing Song
Income Statement - Revenues
Yr ending
Operating Revenues
Passenger
Cargo
Other (net)
Total
2003
2002
2001
12,323 12,321 12,964
464
458
506
516
526
409
13,303 13,305 13,879
Income Statement - Expenses
Yr ending
Operating Expenses
Salaries
Aircraft fuel
Depreciation
Contracted services
Landing fees and other rents
Aircraft maintenance
Aircraft rent
Other expenses
Total
2003
2002
2001
6,342 6,165 6,124
1,938 1,683 1,817
1,202 1,148 1,283
886 1,003 1,016
858
834
780
630
711
801
727
709
737
1,506 2,361 2,923
14,089 14,614 15,481
Operating Expenses
11%
5%
4%
45%
6%
6%
9%
14%
Salaries
Aircraft fuel
Depreciation
Contracted services
Landing fees and other rents
Aircraft maintenance
Aircraft rent
Other expenses
Other Expenses & Net Earnings
Yr ending
2003 2002 2001
Other Income (Expense)
-403
693
262
Earnings Before Tax
-1,189 -2,002 -1,864
Income Tax Benefit
416
730
648
Net Earnings
-773 -1,272 -1,216
Basic and Diluted Loss per Share (’03) : -$6.40
Earnings Trend
18,000
2,500
16,000
2,000
14,000
1,500
12,000
1,000
10,000
500
8,000
0
6,000
-500
4,000
2,000
-1,000
0
-1,500
1996
1997
Opt. Revenues
1998
1999
2000
Opt. Expenses
2001
2002
Opt. Income
2003
Net Income
Balance Sheet
Yr ending
As s et
Current
Property & Equipment
Others
Total Asset
Liability & Equity
Current
Non-current
Deferred
Emp. Stock Owners hip
Shareholder's Equity
Total Liability & Equity
2003
2002
4,967
16,752
4,637
26,356
3,902
16,524
4,294
24,720
6,624
19,582
534
275
-659
26,356
6,455
16,530
578
264
893
24,720
Contractual Payment Due by period
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2,004
Debt
2,005
2,006
2,007
Operating lease payments
2,008
After 2009
Interest & related payments
Fleet Structure & Average Life
9.76
Cash Flow Statement
Yr ending
2003
2002
2001
Beg. Balance
1,969
2,210
1,364
Operating Act
453
285
236
Investing Act
(260)
(1,109)
(2,696)
Financing Act
548
583
3,306
End. Balance
2,710
1,969
2,210
Free Cash per share (’03) = $1.54
Performance Factors (% from ’02 to ’03)











Operating revenues: $13,303 ()
Operating expenses: $14,089 (3.6%)
Operating margin: -5.9% (3.9pt)
Net earning (loss): -$773 (40.06%)
Opt revenue per available seat mile: 9.90¢ (5.4%)
Opt cost per available seat mile: 10.48¢ (1.6%)
Passenger load factor: 73.4% (1.4pt)
Breakeven passenger load factor: 78.1% (1.5pt)
Cargo ton mile yiled: 33.08¢ (8.0%)
Avg aircraft fuel price per gallon: 81.78¢ (22.2%)
End of yr full-time equivalent employees: 70,600 (6.0%)
Ratios
Delta
Valuation measure
P/E ratio
P/E high
P/E low
Profitability measure
Gross margin
Operating margin
Net profit margin
Management Effectiveness
ROA
ROI
ROE (5yr avg)
Liquidity measure
Quick ratio
Current ratio
Industry S&P 500
0.00
0.00
0.00
39.20
35.85
6.29
23.16
44.41
15.38
7.02
-7.37
-19.51
26.93
6.32
2.92
46.90
21.54
13.95
-11.02
-14.84
-9.33
2.45
3.62
5.85
7.27
11.05
19.04
0.46
0.63
1.03
1.33
1.30
1.80
Market Stock Value
Last: US $7.260
3.20%
Open
High
Low
Volume
52-week high
52-week low
Net Change: US -$0.240
7.350
7.400
7.120
7,660,700
13.200
2.750
% Change: -
Bid
Ask
EPS
P/E
Indicated annual dividend
Yield
N/A
N/A
-13.100
0.00
0.00
0.00
Stock Price Movement (1yr)
Stock Price Movement (3yrs)
Recommendation




Huge Outstanding LT Debt
Extremely Volatile Market Condition
No Dividend Payment
Continuous Down Stream Stock Movement
- SELL -
Southwest Airlines
Stock Information
Stock Symbol: LUV
Stock Exchange: NYSE
Stock Price: $15.89
Shares Outstanding: 793.33 M
Market Cap: 12.606B
Dividend: $0.018
Company History
Commenced service on June 18, 1971
– using 3 Boeing 737 aircraft servicing state of Texas
simple notion: lowest possible fares, ontime delivery, and excellent customer
service.
Became a major airline in 1989
2003 was 31st consecutive year of
profitability
Corporate Statistics
Offers flights within United States
2900 flights per day
Flies to 59 cities (60 airports) in 31 states
Operates 405 Boeing 737 jets
Awards
Named “Most admired airline” for the
second straight year in 2003 by FORTUNE
magazine
Ranked in top 5 for “Best companies in
America to work for” by FORTUNE
magazine
Ranked #1 in fewest customer complaints
for 13th consecutive year- Department of
Transportation's Consumer Report.
Southwest Officers
Executive
Herb Kelleher
Gary C. Kelly
Colleen Barrett
Donna Connover
Joyce Rogge
Greg Crum
Position
Service
Chairman of the Board
33yrs
CEO
18yrs
President
26yrs
VP Cust. Operations
27yrs
VP Marketing
16yrs
VP Flight Operations
25yrs
Industry Competitors
Main competitor is the automobile
Other discount airlines ie. Jetblue, AirTran
Airways
Challenges from old-line carriers and
they’re subsidiary upstarts
Market Share
Southwest’s Market Share
Region
(Southwest’s top 100 city-pair markets
based on passengers carried)
Southwest’s Capacity By
External Challenges
Florida hurricanes
Post 9/11 terrorism concerns
Increased security measures
Technology
Competitive Advantage
customer service
Point-to-point carrying strategy
Quick turnaround strategy
low fares
performance enhancing winglets
Employee productivity
– one of the lowest operating cost structures in the industry
New Jet Design
Present and Future Planning
 Recently commenced service from Philadelphia
 Installation of RAPID CHECK-IN kiosks in 2004
 Plan to increase capacity at an average rate of 8%
from 2004-2012
 Expansion projects at Fort Lauderdale, Houston
Hobby, Las Vegas, Oakland, Tampa
Hedging Program
2004 : over 80% at $24/barrel
2005 : over 80% at $25/barrel
2006 : over 60% at $31/barrel
2007 : over 40% at $30/barrel
Financial Statement Analysis
ROE: 5.45%
P/E : 45.85
Price/Book (mrq): 2.28
EP/S : 0.349
Operating Margin (ttm): 7.56%
Dividend Yield: 0.11%
Operating Expenses
other operating
expenses, 18%
Salaries, wages,
and benefits, 41%
depreciation and
amortizations, 7%
landing fees and
other rentals, 7%
aircraft rentals, 3%
agency
commissions, 1%
Maintenance
materials and
repairs, 8%
Fuel and oil, 15%
Income Statement
Company Fleet
Current age of fleet is 9.2 years
Stock-Based Employee
Compensation
Stock-Based Employee Compensation
Composition of Long-Term Debt
Important Statistics
Load Factor: 66.8%
Industry: 79.0%
Break-even Load Factor: 66.75%
Available Seat Miles: 71.7 trillions
Revenue Passenger Miles: 47.9 trillions
Stock Chart
Stock Chart (4 Year)
Recommendataion
Hold
By Alexei
Company History Background
Start as a merger of small UK air
companies in early 19th
Nationalized in 1939 (British Overseas Airways
Corporation)
In 1979 Government intention to sell
BOAC
BA privatised in 1987
Market background
Public company with limited distribution
of shares outside UK (in ADR form)
Stocks Traded
 At London Stock Exchange (BAY)
 At New York Stock Exchange (ADR: BAB)
Number of shares: 1,082,845,212
Price per share: NYSE: $41.48
Dividends counts in Pounds
Debt corporate rating stands at BB+
 Stable, backed by fleet
 3.3 bn ₤
Service/Products
 BA provides scheduled passenger and cargo Airline
services
 154 destinations in 75 countries (last year 174 destinations in 83 countries)
 carried more than 36 million passengers last year
 Programmes
 Club World flat bed
 World Traveller Plus
 Club loyalty programme
 Main base of operation (airports)
 Airport Heathrow (hub structure) 38% of all passengers
 Gatwick (new structure point to point)
 New York John F. Kennedy International Airport (hub)
 Alliances
 Oneworld: Aer Lingus, American Airlines, British Airways, Cathay Pacific,
Finnair, Iberia, Lan Chile and Qantas
 DBA
 Franchise
 Six airways: Loganair, GB Airways, British Mediterranean Airways, Sun Air
of Scandinavia, Comair of South Africa and Regional Air of Kenya
Management
 Rod Eddinghton
 Chief Executive. Executive Board Member since 2000 (in industry
since 1979)
 John Rishton
 Chief Financial Officer. Appointed in September 2001. In BA since
1994
 Martin George
 Director Marketing and Communications. Appointed in 1997.
In BA since 1987
 Mike Street
• Director Customer Service and Operations since 1997.
Executive Board Member since 2000
 Robert Webb QC
• General Counsel. Joined British Airways in 1998
Strategy
Reduce costs ( current improvement by $2 billion)
 Cut jobs (13,000 people)
 Sell and lease airplanes to simplify fleet (fleet
reduction 39 aircrafts in 2004)
 Reduce number of unprofitable routes
Reformation customer service
 New executive Club loyalty programme
 New web site service
 Development of new small routs in UK
Balance Sheet improvement
 Cutting debt amount (selling Qantas shares) Still
₤3.3billion
 Achieve 10% operating margin
Opportunities/threats
Opportunities




Cargo service in Vietnam
New small routs in UK
New customer service (web site)
New terminal 5 in Heathrow in 2008
Threats




Gas prices (overspend $128.8 million)
Two Unions (pension programs)
Italian government
Heathrow charges increased (extra ₤300 million
prepayment)
 UK and EU regulations. Increased insurance, spot regulation
(may be an extra cost of ₤300-400 million)
Competitors
Lufthansa
Air France
Small domestic and European
carriers
Delta
United
Financial statement analysis
Balance Sheet
Income Statement
Cash flow Statement
Main problem – different standards
and currency conversion
Net debt £3.3bn lower
£m
7,000
6,562
6,000
£3.3bn
5,000
4,000
3,286
3,000
2,000
Sep
01
Dec
01
Mar
02
Jun
02
Sep
02
Dec
02
Mar
03
Jun
03
Sep
03
Dec
03
From Q2 http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt
Mar
04
Jun
04
Sep
04
Revenue
%
15
11
10
5
5
2
1
2
0
(2)
-5
(7)
(6)
(8)
-10
(11)
(11)
-15
(14)
-20
Q1
Q2
Q3
2002/03
Q4
FYR
Q1
Q2
Q3
Q4
2003/04
http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt
FYR
Q1
Q2
2004/05
Accommodation,
ground equipment
costs and currency
differences
8%
Selling costs
7%
Handling charges,
catering and other
operating costs
13%
Landing fees and en
route charges
8%
Engineering and
other aircraft costs
6%
Costs
Employee costs
32%
Depreciation and
amortisation
9%
Aircraft operating
lease
1%
Fuel and oil costs
16%
Cost performance
%
16
14.6
Cost reduction
14.3
Net costs
14
12
Unit costs
10.8
9.4
10
8.6
9.1
7.3
8
6.1
5.4
4.5
4.5
6
4
4.4
2.8
2.6
6.1
5.4
2.9
3.4
2.5
3.2
2
0
Q1
Q2
Q3
2002/03
Q4
Q1
Q2
Q3
Q4
2003/04
http://media.corporate-ir.net/media_files/irol/69/69499/presentations/UBS_Q204_05_final.ppt
Q1
Q2
2004/05
Ratio Analysis
Stock
8
Industry
S&P 500
Load factor
70.3
Price/Earnings
5.79
39.20
26
Price/Book
1.11
2.42
4.3
Price/Sales
0.4
1.2
3.1
Price/Free CF
2.63
14.45
16.39
Operating Margin
6.73
6.32
18.07
7
6.78
6.27
6
5.47
5
4.33
4.29
4.03
4
Financial Leverage
Debt/Equity
4.26
3.82
3.5
3.4
3.1
3
2.37
2
1
0
0.15
1995
0.13
1996
0.08
1997
0.05
1998
0.04
1999
0.07
2000
0.07
2001
0.16
2002
2003
2004
ADR price chart
Recommendation
Pro
 Opportunities for growth in Asia
 Improved debt situation
Cons
 No CF to investors
Long run recommendation
 SELL